When it comes to employment agreements, law firms are in a unique position with their attorney employees. While attorney-client relationships are business relationships, lawyers play a larger essential role in society by helping the public navigate the legal system.
This unique role can mean that certain anti-competition agreements between lawyers and firms can infringe on an attorney’s right to practice and might not be upheld by courts.
What indirect disincentives can law firms place on attorneys who are leaving the firm’s practice and taking clients with them? The Colorado Court of Appeals considered this question in April, finding courts must balance a series of factors when looking at disincentive practice agreements.
Grant Bursek worked as an associate at Johnson Family Law, P.C., doing business as Modern Family Law, a national firm with several offices in Colorado. Bursek was with the firm from 2018 through 2019 before he resigned. When he left the firm, 18 of Bursek’s clients decided to follow him.
When he was still at MFL, Bursek signed a reimbursement agreement to pay the firm $1,053 for every client that chose to leave the practice if he separated from the firm. Bursek said that he wasn’t sure if the agreement was legal when he signed it, but did so anyway.
The agreement explained that the $1,053 per-client fee covered marketing and recruiting costs for getting new clients. The amount estimated historic costs for recruiting clients, but wasn’t specific to any cases.
When Bursek resigned in September 2019, MFL requested $18,963 per the agreement. Bursek refused, saying it was an unenforceable agreement and MFL filed a complaint asking the Denver District Court to decide if the agreement could be enforced. The Denver District Court ruled that the agreement restricted Bursek’s right to practice law, and ruled it couldn’t be enforced. MFL asked the Colorado Court of Appeals to consider the case.
Colorado, like many courts across the country, has long held agreements that prohibit post-departure client representation restrict a lawyer’s right to practice. But the agreement between Bursek and MFL was a financial disincentive for leaving with clients, not a direct ban.
For the first time in Colorado, the Court of Appeals looked at how indirect disincentives, like a departing client fee, intersect with a lawyer’s right to practice law under Rule 5.6(a) of Colorado’s Rules of Professional Conduct, and, if agreements like the one between MFL and Bursek are legal.
A Balancing Act
The Colorado Court of Appeals opened its opinion with a 1986 observation from the late U.S. Supreme Court Chief Justice William Rehnquist: “[attorneys] in law firms have become increasingly ‘mobile,’ feeling much freer than they formerly did and having much greater opportunity than they formerly did, to shift from one firm to another and take revenue producing clients with them.”
Rehnquist’s observation from more than 30 years ago is still relevant. Attorneys, both in-house and at firms, have reported higher attrition rates and an increased desire to leave their current positions for better opportunities. While law firms grapple with higher levels of turn over, burn out and changing workplace expectations, many will also deal with the financial impact that comes when attorneys leave and bring clients with them.
The Colorado Court of Appeals wrote that while considering this case it needed to balance the “legitimate interests of law firms facing the reality of increased lawyer mobility in modern practice” with the interest of clients, attorneys and an attorney’s right to practice law protected by Rule 5.6(a).
State courts across the country have been split on if indirect disincentives unreasonably restrict a lawyer’s right to practice.
A majority of courts have read Rule 5.6(a)’s counterparts to ban agreements that create a cost for lawyers leaving and taking clients with them.
The New York State Court of Appeals in 1989 held a law firm needed to pay a departing partner earned but uncollected partnership revenues even though he went on to work for a competing firm, triggering a forfeiture-for-competition clause in his partnership agreement. The leaving partner took several clients with him to the competing firm as well as an associate attorney. The decision reversed a lower court’s ruling that the forfeiture-for-competition clause was a financial disincentive that didn’t impede an attorney’s right to practice. Instead, the New York State Court of Appeals ruled, by creating a significant monetary penalty for departing partners, the forfeiture-for-competition agreement “would functionally and realistically discourage and foreclose a withdrawing partner from serving clients,” ultimately impacting a client’s choice of counsel and creating an “impermissible restriction on the practice of law.” The New York State Court of Appeals noted that its reasoning was narrow and tailored to the case’s circumstances.
The New Jersey Supreme Court came to a similar conclusion in 1992, but took a broader approach. It found that several partners that left their previous employer to start a competing firm, taking lucrative clients as well as legal talent with them, were still entitled to termination compensation despite a service termination agreement with a competitive departure clause. The New Jersey Supreme Court reasoned that “by forcing lawyers to choose between compensation and continued service to their clients, financial-disincentive provisions may encourage lawyers to give up their clients, thereby interfering with the lawyer-client relationship and, more importantly, with clients’ free choice of counsel.”
Other courts have interpreted financial disincentives as financial consequences that might penalize a departing attorney, but don’t restrict their right to practice, and look out for the business interests of a firm.
In 1993, the Supreme Court of California ruled that an agreement that imposes a reasonable cost to disincentivize a departing attorney from competing doesn’t restrict the right to practice and can be enforced. The California high court explained it meant “to achieve a balance between the interest of clients in having the attorney of choice and the interest of law firms in a stable business environment.” The Arizona Supreme Court took a similar stance in 2006, holding that firms can enter into reasonable agreements that create financial disincentive for departing lawyers that compete.
The Colorado Court of Appeals didn’t agree entirely with either position adopted by other state courts.
New York and New Jersey’s interpretation, according to the Court of Appeals, overestimated the impact that financial disincentives against attorneys have on clients and didn’t account for business interests behind the agreements. But it also wasn’t convinced by California and Arizona’s position. Financial disincentives can impact a lawyer’s right to practice law and aren’t always just an economic consequence, the court held.
While disincentive agreements don’t automatically conflict with Rule 5.6(a), the Colorado Court of Appeals reasoned, agreements that unreasonably restrict a lawyer’s right to practice are unenforceable. According to the Court of Appeals, reasonableness can be determined by a disincentive’s impact on attorney autonomy, client choice, the financial impact to the firm, the relationship between the disincentive and the firm’s impact and if, beyond just disincentivizing competition, there are other reasons behind the disincentive.
Courts should decide if a financial disincentive is enforceable on a case-by-case basis, the Colorado Court of Appeals added.
In Bursek’s case, MFL’s agreement was not reasonable, the Colorado Court of Appeals ruled.
For one, Bursek was an associate, not a partner, the Court of Appeals explained, meaning that while he might take clients with him, his departure wouldn’t harm MFL to the extent that a higher ranking attorney leaving might. And while MFL did spend money to recruit the clients leaving with Bursek, the per-client fee based on historic costs wasn’t specifically calculated for any of the departing clients. Further, the Colorado Court of Appeals explained, Bursek’s clients had a particular interest in leaving the firm to stay with him. Since family law cases involve relationships and often emotional situations, Bursek’s clients had legitimate interests to stay with him rather than the firm.
Weighing the interests of Bursek, his clients and MFL, the Colorado Court of Appeals held that the agreement was unreasonable and therefore unenforceable.